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Stability or Sadomonetarism?

July 1, 2014 4:48 pmJuly 1, 2014 4:48 pm

Simon Wren-Lewis is harsh about the current tight-money crowd, exemplified by the Bank for International Settlements, who
are urging tight money despite weak economies, for fear that investors will take excessive risks. But he’s not harsh enough.

He’s right that it’s more or less insane to argue that the economy must be kept persistently depressed for fear that investors will be too exuberant — and at the same time to argue against fiscal
expansion or anything else that might offset rising rates. What he doesn’t note, however, is that while the BIS has argued for raising interest rates at least since 2010, it keeps changing its reasoning.
Here’s what it said in 2011 (pdf):

Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks. It is also crucial if central banks are to preserve their hard-won inflation fighting credibility,
which is particularly important now, when high public and private sector debt may be perceived as constraining the ability of central banks to maintain price stability. Central banks may have to be prepared
to raise policy rates at a faster pace than in previous tightening episodes.

And it praised the ECB for what we now know was a terrible decision to raise rates.

So, that was three years ago, and Europe in particular is struggling with dangerously low inflation. Has the BIS changed its prescriptions? No, it’s just changed the reason for demanding the same thing.

What all this suggests is that the BIS basically just wants to raise rates, and is always looking for a reason. It’s about sadomonetarism, not stability.